The Remittance-Driven Economic Paradox of Nepal
The roots of Nepal’s labour migration lie in the historic Gurkha tradition, which began formally after the Treaty of Sugauli in 1815-16 between Nepal and British India, following the Anglo-Nepalese War. As part of this treaty, Britain gained the right to recruit soldiers from Nepal into the British Army, establishing the first Gurkha regiments in 1816. Over the decades, Nepali men serving in the British and later Indian armies became symbols of bravery and discipline, creating a proud legacy that defined national identity abroad. However, what began as selective military enlistment has, in modern times, transformed into mass civilian outmigration. Today’s exodus involves millions of Nepalis, primarily unskilled, working across the Gulf, Southeast Asia, and beyond. This evolution has taken the Gurkha ethos of serving foreign lands to an entirely different scale, now reshaping Nepal’s economic structure, hollowing out its workforce, and fraying the social and demographic fabric of the nation. The romanticised tradition of the Gurkha has become, in effect, a socioeconomic fault line what may now be more aptly called the Gurkha Syndrome.
Nepal has consistently ranked among the world’s top 10 countries in remittance-to-GDP ratio, often even in the top five. However, it stands out due to the scale of migration and the size of the remittance inflow relative to its economy. Unlike smaller remittance-dependent economies such as Tonga or Kyrgyzstan, Nepal’s much larger population and GDP base makes this dependency even more consequential.
Remittance has become the primary force behind poverty reduction in Nepal. While poverty declined by merely 4% between 1990 and 2000, it dropped by 18 percentage points from 38% to 20% over the next two decades (2000 to 2024), an impressive achievement despite the country’s low economic growth and limited formal employment generation. This improvement has come not through productive transformation or domestic employment growth, but from the external earnings of its citizens abroad, especially since the turn of the millennium.
Sustained remittance inflows have significantly reshaped Nepal’s macroeconomic structure. Remittance has become the cornerstone of Nepal’s external sector stability and financial sector expansion. It contributes more than 60% of gross foreign exchange earnings. Over the past three years alone, foreign exchange reserves have doubled to $19 billion and now exceeds 42% of GDP, enough to cover more than 15 months of imports, thanks to strong remittance inflows and a sharp decline in imports. This recovery came after the 2022 external sector stress episode, when the trade deficit, current account deficit, and balance of payments deficit had reached alarming levels of 35.6%, 12.5%, and 5.1% of GDP, respectively.
Similarly, both money supply and bank deposits have surpassed GDP since 2020, while private sector credit peaked in 2021 at over 95% of GDP and has remained above 91% since then. Notably, in 2009, Nepal saw a structural shift as private debt exceeded public debt for the first time, a trend that has persisted.
However, this remittance fuelled economic model comes with mounting demographic, social and economic costs. The magnitude of outmigration in Nepal is historically unprecedented under usual normal conditions. On average, around 2,300 people, of which around 300 are students, leave the country each day. To put this in perspective, half a dozen municipalities have populations under 2,500; in effect, Nepal loses a population equivalent to Manang district every three days, and Mustang district every week. With more than 11% of the population, disproportionately youth, leaving in just four years, Nepal may be experiencing one of the highest outward migration rates in the world.
Migration is no longer a coping strategy; it has become a national aspiration. The country is undergoing a socioeconomic transformation where status is equated with being abroad. Young people stopped entering the workforce, pinning their hopes on jobs abroad. The domestic labour force is increasingly replaced by workers from India and Bangladesh, creating a paradox where the nation cannot provide employment to its own citizens while importing labour to meet local demand.
Remittances have fuelled liquidity and consumption in the economy but have failed to generate meaningful productive investment. The banking system has seen robust growth in private sector credit expanding by over 20% annually for over three decades. However, credit allocation has been overwhelmingly skewed toward unproductive sectors, primarily import driven consumption, real estate and low value addition sectors.
Nepal’s exports account for less than 3% of GDP, while imports average around 33% over the past decade, resulting in one of the world’s most severe trade deficits. This imbalance reflects years of structural inefficiencies, implementation bottlenecks, lack of strategic foresight and innovation, and persistent resource misallocation. As a result, Nepal’s economic model remains both vulnerable and unsustainable in the long run.
Real estate has absorbed the bulk of remittance-fuelled credit, driving land prices to astronomical levels. Kathmandu now has land prices which are one of the highest in the world, despite Nepal’s status as one of poorest nations. In general, the price of land across Nepal is one of the highest relative to its per capita income. This has created a distorted economy where land serves as a secure investment asset with higher returns rather than a productive input. Until recently, land prices had been rising in tandem with the credit growth, before peaking in 2022.
The land price has choked off infrastructure development and productive investment fuelled outmigration. For example, the compensation for land acquisition for the Lumbini International Airport was nearly three times the cost of constructing the airport itself. Similarly, billions of rupees have already been spent on land compensation in the 1,200 MW Budhigandaki Hydroelectric Project, rendering it financially unviable even before its construction. No industry or business can operate when land acquisition alone consumes an unsustainable share of capital. When buying land is the only option, the costs are inevitably passed on to consumers – evident in the exorbitant fees charged by some private schools in Kathmandu Valley. Similarly, the inflated real estate market is driving families to fund expensive foreign studies for their children, reinforcing the very cycle of outmigration and dependence on remittance income.
Nepal’s price level is among the highest in South Asia, second only to the Maldives, despite having the lowest per capita income in the region after Afghanistan. The country has some of the world’s highest import duties on vehicles, and astronomical land prices. As a result, even a Nepali earning $14,000 per year, the lower threshold for high-income country status, would struggle to afford a house or car domestically.
In response to rising costs of living, the government has been raising the minimum wage, which now stands at 1.12 times Nepal’s per capita income, the fifth highest globally on a relative basis. This undermines Nepal’s already fragile competitiveness, particularly in labour-intensive sectors. Ironically, these minimum wage laws are strictly enforced only for Nepali workers, giving Indian and Bangladeshi migrants an edge in the domestic labour market. Nepal has, therefore, lost all three classical factors of production – land, labour, and capital, as sources of comparative advantage.
The current stability arising from massive growth in foreign exchange reserves has once again created a false sense of macroeconomic stability and economic recovery among policymakers, masking the economy’s deep-rooted structural weaknesses. The high reserves in the last three years are not a result of higher domestic production, robust exports or competitive industries, but a byproduct of very high remittance inflows and lower imports compared to the peak in 2022. This form of external sector stability is fragile and unsustainable, especially if global conditions change or outmigration begins to taper.
In economic parlance, Nepal’s remittance driven economy is often loosely likened to the ‘Dutch Disease’ phenomenon. However, the underlying causes, transmission mechanisms, and long-term implications are fundamentally different. The term Dutch Disease originated in the 1970s when the Netherlands discovered natural gas. The resulting export boom led to currency appreciation, which weakened other tradable sectors and caused sectoral imbalance. This phenomenon has since become a widely cited cautionary tale for resource-rich economies, highlighting how sudden windfalls can distort a country’s macroeconomic fundamentals.
Nepal, by contrast, presents an equally concerning but structurally different case, one defined not by a resource boom but by aspirational outmigration and sustained remittance inflows. Unlike Dutch Disease, which stems from state-controlled resource exports and direct fiscal windfalls, Nepal’s external earnings come primarily from household-level income earned abroad, largely untaxed, and channelled into consumption and unproductive sectors by open market forces. It is tempting to classify Nepal’s current trajectory as a variant of Dutch Disease, but the analogy does not hold. The contrasts are striking:
Source of Wealth: In Dutch Disease, the state benefits directly from natural resource rents. In Nepal, remittance income accrues to households and is not taxed.
Currency Dynamics: Dutch Disease typically leads to currency appreciation, harming export competitiveness. Nepal, however, maintains a fixed exchange rate with the Indian rupee. While this peg dampens nominal appreciation, Nepal has likely experienced real appreciation over time, particularly in relation to India, through differential inflation, economic growth and sustained foreign exchange inflows.
Government Revenue: Natural resource revenues enter state coffers directly, allowing governments to fund public investments or subsidies. In Nepal, fiscal gains from remittance are indirect, mainly via import duties and indirect taxes making the state fiscally less active in this transformation.
Labour Dynamics: In Dutch Disease, labour shifts from industry to booming sectors like extractives or services. In Nepal, labour has exited the country entirely, creating a demographic and economic vacuum. This outmigration has hollowed out the domestic labour force and diminished the social contract between the citizen and the state.
Unlike Dutch Disease, where resource wealth crowds out competitiveness, Nepal’s condition is one of economic depletion through demographic erosion and economy-wide misallocation of resources. The Gurkha Syndrome can be characterised by the following:
Societal disengagement, where aspirations lie outside the country’s borders.
Massive depopulation of working-age citizens and decline in aggregate demand due to prolonged large-scale labour absenteeism.
Stagnant domestic labour market and low productivity growth.
Real estate-driven financialisation and weak allocative efficiency of economy
Erosion of cost competitiveness due to high price levels and production costs relative to levels of income and development.
Nepal’s remittance-fuelled economy has contributed significantly to poverty reduction and macroeconomic stability as a primary, first-round effect. However, it has failed to deliver sustained economic growth and internal employment through second-round spillover effects, largely due to market failures, lack of innovation, and the resulting misallocation of resources. This dynamic represents a remittance paradox – while remittances have lifted millions out of poverty and stabilised the economy, they have also contributed to structural challenges such as weakened productive base, chronic external dependence, and policy complacency. To overcome this paradox, Nepal must focus on strengthening second-round impacts by channelling remittance-driven resources into productive, growth-generating sectors through the following measures:
Reallocate financial resources toward productive investment, especially in agriculture and agro-processing, endowment-based industries, natural resource exports, value-added industries, education and skills, and export of services by leveraging the rise of borderless and weightless global economy.
Prioritise and build public infrastructure that strengthens productivity and production systems, catalysing private and public investment for higher growth and job creation.
Reform land and labour markets to reduce costs and enhance access to productive use, enabling greater efficiency and competitiveness.
Enhance education and skill development to improve domestic productivity, reduce migration-driven push factors, support a transition from labour exports to service exports, and lay the foundation for a knowledge economy.
Develop innovative institutional mechanisms, such as Sovereign Investment Fund (SIF) to strategically channel foreign exchange reserves into productive sectors spurring investment, enabling technology transfer, enhancing productivity and innovation, and attracting private and public capital.
Mobilise long-term domestic savings including retirement funds (Employee Provident Fund, Citizens Investment Trust, Social Security Fund) and reserves of insurance companies by creating an enabling environment for their investment in productive social enterprises such as education and health and emerging sectors such as information and technology. This can be designed in synergy with the SIF to create an integrated investment ecosystem for Nepal’s transition to a knowledge-based economy.
Adopt sovereign enterprising as a national strategy, aligning economic diplomacy to expand global trade and investment footprints, secure market access, and integrate into global value chains.
Leverage the Nepali diaspora as global champions of prosperity by ensuring their continued citizenship rights even after acquiring foreign nationality, and by introducing open, liberal and target policies, investment vehicles, and collaboration platforms that channel their capital, expertise, technology, and networks toward Nepal’s’ development priorities.
The future cannot be built on the back of absentee labour and imported consumption. Nepal must reclaim its people, invest in education and skills, bring down its high price levels, especially land prices, refocus its resources, regain competitiveness, and reimagine its economy, or risk becoming a nation that lives off the earnings of those who no longer live within it. Nepal risks falling into a lower-middle-income trap unless it integrates into global value chains through sustained natural resource and service exports and achieves 6% to 7% annual economic growth over the next two decades.
Nepal’s experience is a powerful reminder that while global economic concepts provide valuable insights, the narratives, terminology, and policy frameworks of developing countries must also reflect their unique realities. ‘Dutch Disease’, for instance, is a landmark concept rooted in a specific historical and economic context, but not all structural distortions fit neatly into such moulds. Nepal’s case, shaped by remittance-fuelled distortions and a long-standing tradition of labour migration, may be more aptly described as the ‘Gurkha Syndrome’. This is more than just an economic anomaly; it is a socio-political phenomenon that calls for deeper research, context-sensitive vocabulary, and imaginative policymaking.
As we strive for a more inclusive global development discourse, it is essential to learn from international experiences while also ensuring that the unique trajectories of countries like Nepal are analysed, named, and addressed on their own terms. This remittance driven model has proven to be both a driver of poverty reduction and a source of deep structural vulnerability – a paradox where welfare gains coexist with long-term economic fragility. This demands a distinct body of literature and policy engagement rooted in Nepal’s context and complexity. Like many developing nations, Nepal deserves solutions rooted in its own reality, context and complexity.
(Dr. Gauchan is Executive Director of Institute for Integrated Development Studies (IIDS). The author acknowledges the use of AI-assisted tools for editorial clarity and flow; however, all analysis, ideas, interpretations, and arguments are entirely the author’s own.)
